Taxing the digital frontier: Comply or face exclusion

By: Hannah Jean Saingan

In response to the evolving world of digital commerce, the Bureau of Internal Revenue (BIR) issued Revenue Regulations (RR) 16-2023 last Dec. 21, 2023, further amending provisions of Sections 2.57.2 and 2.57.3 of RR 2-98. The latest RR imposed a withholding tax on gross remittances made by electronic marketplace (e-marketplace) operators and digital financial services providers (DFSPs) to sellers/merchants.

The newly implemented withholding tax is 1 percent, applicable to half of the gross remittances paid by e-marketplace operators and DFSPs to sellers/merchants for goods or services sold through their platforms or facilities. This regulation further discussed the exemptions that apply if annual total gross remittances do not exceed P500,000 or cumulative gross remittances in a taxable year are below the P500,000 threshold. Exemptions also apply if the seller/merchant is duly exempt or subject to a lower income tax rate.

One of the major changes introduced by RR 16-2023 is that e-marketplace operators and DFSPs can no longer allow unregistered businesses to operate on their platforms. Sellers or merchants that previously operated outside the formal tax system are now mandated to register their businesses with the BIR.

Given that this change will significantly affect the businesses of unregistered sellers on said platforms, they are compelled to reassess their strategies for online transactions. The regulations pose a critical question for unregistered sellers/merchants: Do they comply or risk exclusion? This regulatory change prompted several questions from taxpayers, leading the BIR to issue Revenue Memorandum Circular (RMC) 8-2024 on Jan. 15, 2024, which clarifies the provisions outlined in RR 16-2023.

Here are some of the key highlights of RMC 8-2024:

– Effective implementation and transitory period. The withholding tax obligation of e-marketplace operators and DSFPs, pursuant to RR 16-2023, took effect on Jan. 11, 2024, 15 calendar days following the publication of the RR on Dec. 27, 2023.

A transitory period of 90 days was given to e-marketplace operators and DFSPs to adjust and comply with the policies or requirements of other government agencies. Following the transitory period, e-marketplace operators and DFSPs should no longer allow unregistered businesses to sell goods and services on their platform or facility.

– Gross remittances. The annual total gross remittances of P500,000 to an online seller/merchant includes all remittances received from all e-marketplace operators and DFSPs, provided that if any e-marketplace operator or DFSP determines that the gross remittances within its online platform have exceeded P500,000 at any point in the taxable year, the prescribed withholding tax will be automatically deducted from the particular remittance surpassing the threshold, and this deduction will be imposed on subsequent remittances.

– Obligations of sellers/merchants. Sellers/merchants are required to register their business with the BIR and submit a copy of the BIR-issued certificate of registration (CoR) or BIR Form 2303 before utilizing the e-marketplace facility.

Additionally, a Sworn Declaration (SD) in the form prescribed in Annex A of RMC 8-2024 must be submitted on or before the 20th day of the first month of each taxable year to the BIR if gross remittances are expected to be below P500,000.

Failure to submit the SD will result in an automatic deduction of withholding tax by e-marketplace operators or DFSPs. In case gross remittances exceed the threshold during the taxable year, the BIR-received SD must be submitted immediately.

– Obligations of e-marketplace operators and DFSPs. They are required to ensure that all sellers/merchants using their platforms are registered with the BIR by requiring the submission of their CoR; to monitor the gross payments of buyers/customers and deduct the withholding tax before remitting the same to the concerned sellers/merchants; and to provide sellers/merchants with the Certificate of Creditable Tax Withheld at Source (BIR Form 2307) within the stipulated time frame as specified in the Tax Code.

– Withholding tax obligation. This will arise upon the e-marketplace operator and DFSP's receipt of the BIR-acknowledged SD indicating that sellers/merchants have surpassed the P500,000 limit; if the seller/merchant fails to submit the required BIR-acknowledged SD within the specified timeframe; or when the e-marketplace operator or DFSP determines that its cumulative gross remittances to the respective seller/merchant have surpassed P500,000.

RMC 8-2024 clarifies that pursuant to RR 16-2023, if payments are transmitted to the seller/merchant through different channels, i.e., electronic wallets, credit cards, and cash payments, the last facility in control of the payment before fully remitting it to the seller/merchant bears the responsibility to withhold taxes. In essence, the withholding tax obligation rests with either the buyer or e-marketplace operator/DFSP.

– Filing requirements and penalty provisions. Withholding agents should utilize BIR Form 0619-E for the first two months and BIR Form 1601-EQ for the last month of the quarter to file the withholding taxes. The alphanumeric tax codes to be used are not yet available and will be issued through a subsequent circular.

Violation of any provisions outlined in RR 16-2023 will result in appropriate penalties as per the Tax Code and relevant laws, rules and regulations.

As the country's retail sector continues to expand into the digital space, expect tax authorities to likewise focus their attention on making sure all parties in that vibrant, virtual marketplace operate within the country's tax system and contribute their due to Philippine coffers.

As published in The Manila Times on 5 February 2024. The author is an Assistant Manager with the Tax & Corporate Services division of Deloitte Philippines.